No need for your clients to sweat over summer market turmoilAugust 19, 2019
As an advisor, if given a choice, most clients would prefer their investment experience to resemble the tranquility of relaxing at the beach rather than the nail-biting, stomach-turning experience faced by roller coaster riders.
Once upon a time, before instantaneous news, machine-trading algorithms, and market-devastating tweets, the equity markets, in general, were relatively rational. Those days are long gone, however, and both advisors and investors are faced with a new, more volatile equity market paradigm.
Let’s look at a couple of very recent examples:
- On August 1st, President Trump announced that an additional 10% tariff will be put on an additional $300 million of Chinese products. The Dow Jones Industrial Average Index (Dow), which was up by more than 250 points, instantly reversed itself and fell by more than 540 points.
- On August 13th, President Trump tweeted that he has decided to exempt some products from the 10% tariff in order to save Christmas for the US consumer. Once again, the market reaction, due in part to – one can suspect – machine-trading algorithms, quickly reversed a 100-point drop in the Dow and skyrocketed up over 450 points.
- This euphoria lasted less than a day, as the Dow fell a whopping 800 points the next day due to US yield-curve inversion fears.
The yields on 10-year US Treasury bonds has now dipped below the yield on the US 2-year for the first time since 2007 — just before the recent Great Recession. Of course, this has triggered a plethora of panic selling and algorithm, machine-based trading. Regardless of the legitimacy of the selling, how do you think your average client felt when they heard what was going on? (As a side note, during the market crash of 2008, the private apartment index in Canada increased by 6.5%, while the TSX and public REITs fell by over 31% and 38% respectively.)
Now, to be fair, history has proven that eventually the equity markets will bottom out and once again begin an upward climb. The question remains, however: “Why should clients suffer through endless cycles of unpredictable volatility when they can obtain just as good or even better results with significantly less pain or volatility?”
If you want to get your clients off the equity market rollercoaster, or at least want to limit the impact of Mr. Market on their overall portfolio, you may want to look towards private real estate and see whether or not its inherent return/volatility profile is more akin to your investment style.
In order to help facilitate that analysis, we have plotted the average return generated by each asset class over the last 30 years against the inherent volatility of the asset class, as represented by its standard deviation of returns.
Graph 2 clearly shows that over the last 30 years, which saw more than its fair share of economic and market cycles, the returns on Private Canadian Apartments have been significantly less volatile than the returns associated with Canadian, US and Global equity markets. In fact, the returns on Private Canadian Apartments have been on average 68% less volatile than those of the three equity markets depicted on the graph.
So, why not let your clients get their roller coaster thrills at the amusement park and not at the hands of Mr. Market by adding Private Canadian Apartments to their investment portfolio?